Is the next great financial crisis already in the making? That may be the question many investors are now asking, and recent economic and geopolitical developments seemingly suggest that the next major recession could hit as soon as next year.
The U.S. Fed is widely expected to clear the way for a July rate cut at its meeting later this week. A rate cut by the central bank would be the first in more than a decade and could set the stage for additional cuts in the months ahead.
An increasingly hawkish Fed had been a major risk for financial markets in recent months, but the central bank has now done a major about-face and turned increasingly dovish. The problem is, any action taken by the central bank may not be enough to stop the next financial crisis.
Among the key risks faced by global markets is the ongoing U.S./China trade war. Thus far, neither side has been willing to blink and hopes for some progress being made at the upcoming G20 meeting appear to be fading fast. If the situation escalates further, both nations could impose additional tariffs or take even more drastic measures. Imagine, for a moment, that China decides to close its markets to U.S.-based multinationals like Apple.
Such a scenario would be enough to send shockwaves throughout the global financial system and there would be little, if anything, that central banks could do to right the ship.
The war on trade isn’t the only problem. Oil poses another potential risk that could have a ripple effect on global markets. The U.S. has taken a hardline stance with Iran, and rhetoric between the two nations has grown increasingly tense. Last week, two oil tankers were attacked in the Strait of Hormuz, a key shipping lane that is one of the globe’s most strategically important choke points. Any shocks to the oil market could see prices increase rapidly by $7 to $10 per-barrel.
The combination of increasing tariffs and higher energy costs could potentially have a significant impact on disposable income. As consumer spending sees a sharp decline, companies would also likely begin to cut back on hiring, investment and expansion plans. This could set off a chain reaction that could force the global economy into recession despite any further action from the Fed or other central banks.
Clearly, some investors appear to be getting the message. The risks to the economy are on the rise, and now may be the ideal time to add diversity and to cut down on equity market exposure. Money managers have been increasing their bullish positioning in gold for the third straight week, and the market has seen an increasingly bullish technical posture.
The market is vulnerable to a pullback at this point, however, and some back-and-fill trade may even be a good thing before the market attempts to push higher. Against the current economic and geopolitical backdrop, gold appears poised to continue its recent ascent. The only major potential roadblock at this point could be if the Fed does not meet increasingly dovish expectations. Even if that is the case, prices are not likely to fall far, and investors may be happy to scoop up the metal on any significant dips.